We recently compiled a list of the 7 Most Undervalued Auto Stocks To Buy According To Analysts. In this article, we are going to take a look at where Rush Enterprises, Inc. (NASDAQ:RUSHA) stands against the other undervalued auto.
Evolving Dynamics in the Auto Industry
As reported by TipRanks, Morgan Stanley recently released a report, in which in which it pointed out major changes in the automotive industry, mainly due to China’s growing production capabilities. The firm mentioned that China is now making 9 million more cars than it sells, which is shaking up competition in the Western market.
Due to this, the bank has downgraded its assessment of the U.S. auto industry from Attractive to In-Line. The change reflects rising vehicle inventories in the U.S., affordability challenges for consumers, and an increase in credit defaults among less-than-prime borrowers.
On a brighter note for car dealerships, the bank upgraded several franchise dealer stocks to Overweight.
The firm believes that worries about franchise dealers have diminished, especially compared to the challenges faced by automakers linked to China and their electric vehicle investments. The perspective shows a shift in attention, as China moves from being a source of demand to one of surplus supply, impacting global automotive trends.
Moreover, in another report by the bank named “The Future of Cars,” the firm discussed that advancements in technology are projected to drive a rise in software-defined vehicles (SDVs), potentially making up 90% of vehicle production by 2029 and dominating the market by 2040.
SDVs will feature improved computing power that allows for remote updates similar to smartphone apps, which could lead to an expected increase in chip spending of approximately $15 billion over the next five to six years.
However, the path to widespread SDV adoption will involve challenges. Manufacturers need to make sure these vehicles are viewed as safe, addressing cybersecurity concerns and redesigning traditional vehicle architectures. By consolidating multiple functions into fewer high-performance processors, automakers can streamline designs and support advancements in automation and self-driving technology.
Long-Term Perspective on EV Industry in the West
Like every other industry in the 21st century, the auto industry is also evolving and the most common topic of discussion is the EV industry. While the industry has grown significantly over the last few years, it has experienced a slowdown recently due to several factors including slow growth of infrastructure and higher prices compared to ICEs.
In a recent interview with CNBC, Christian Kames, managing director of Lazard, addressed concerns from European automakers about declining demand for electric vehicles and potential reductions in electrification plans.
He suggested that these worries might be overstated, as the automotive industry is undergoing a significant transformation, with new technologies often facing initial hype followed by periods of disappointment.
Kames acknowledged the current lack of demand and insufficient charging infrastructure but highlighted that global initiatives are being implemented to improve EV infrastructure and technology investments. He expressed confidence that electrification will ultimately succeed. He suggested that European manufacturers need to keep investing to maintain competitiveness in the long run.
When discussing future leaders in the EV market, Kames recognized the rising competition from Chinese brands but argued that it is too soon to discount Western automakers. He emphasized that all major car companies are aware of the ongoing transformation and are taking action to adapt, which will be crucial in the next few years.
Apart from electrification, autonomous vehicles are the next big thing. According to Precedence Research, the global market for autonomous vehicles was valued at approximately $158.31 billion in 2023 and is expected to reach around $2.75 trillion by 2033. This represents a compound annual growth rate of 33% from 2024 to 2033.
Our Methodology
For this article, we used stock screeners to identify over 70 auto manufacturers along with auto and truck dealership stocks. Next, we narrowed our list to 7 stocks with forward price-to-earnings ratios below 15 and the highest average analyst price target upside, as of October 4. The most undervalued auto stocks are listed in ascending order of their average analyst price target upside. We also added the hedge fund sentiment around each stock which was taken from Insider Monkey’s database of 912 hedge funds as of Q2.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A convoy of vehicles in a large parking lot, showing the myriad of leasing and rental services offered.
Rush Enterprises, Inc. (NASDAQ:RUSHA)
Number of Hedge Fund Holders: 18
Forward PE Ratio: 14.66
Average Price Target Upside: 22%
Rush Enterprises, Inc. (NASDAQ:RUSHA) is a provider of solutions for the commercial vehicle industry. It operates Rush Truck Centers, the largest network of commercial vehicle dealerships in North America. Rush has over 200 dealer networks across the US and Canada. It ranks at 4 on our list of most undervalued auto stocks.
The centers represent manufacturers like Peterbilt, International, Ford, and others, and offer a range of services including vehicle sales, parts, service, body shop operations, and financial services.
Apart from Rush Truck Centers, the company’s divisions include Rush Truck Leasing for leasing and rentals, and Rush Bus Centers specializing in school and commercial buses. Additional offerings cover crane and refuse systems, towing solutions, vehicle insurance, and custom chrome parts through brands like Chrome Country.
Rush (NASDAQ:RUSHA) also focuses on CNG fuel systems with its joint venture, Cummins Clean Fuel Technologies, and offers vehicle up-fitting services through Custom Vehicle Solutions. Its specialized businesses include Perfection Truck Parts & Equipment, The House of Trucks, and World Wide Tires, each providing tailored products and services for commercial transportation.
In the second quarter, the company reported revenues of $2 billion and a net income of $78.7 million, or $0.97 per diluted share. The company announced a 5.9% increase in its quarterly cash dividend, now at $0.18 per share.
Despite challenges in the trucking industry, particularly due to low freight rates, company management noted strength in key customer segments like the public sector and vocational, which strengthened Class 8 truck sales and market share.
Aftermarket product demand declined slightly, with parts, service, and body shop revenues dropping 3.6% year-over-year. Truck sales remained strong, with 4,128 new Class 8 trucks sold, but were impacted by an 18.6% decline in the U.S. Class 8 retail sales due to lingering freight recession and higher order cancellations. Class 4 through 7 truck sales showed resilience, with 3,691 units sold. Used truck sales fell 7.8% year-over-year due to weak demand and increased competition from new trucks.
For the future, Rush (NASDAQ:RUSHA) expects the challenging market conditions to persist, particularly in new Class 8 truck sales, while vocational truck sales should remain strong. The company is focusing on expense reductions and leveraging its diverse customer base to navigate the tough market environment. Nevertheless, the CEO and President, Rusty Rush is optimistic about the company’s ability to perform well in downturns.
Overall RUSHA ranks 4th on our list of the most undervalued auto stocks to buy according to analysts. While we acknowledge the potential of RUSHA as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RUSHA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.